Measuring ESG risk premia with contingent claims

Ioannis Michopoulos, Alexandros Bougias, Athanasios Episcopos and Efstratios Livanis

The European Journal of Finance, 2025, vol. 31, issue 4, 427-450

Abstract: We propose a contingent claims approach for estimating ESG risk premia from market information and market participants' decisions. To this end, we infer the asset value dynamics via the structural model of Merton [1974, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance 29: 449–470.] for a large panel of S&P 500 firms using an estimation algorithm that utilizes the information embedded in stock market prices, CDS spreads, and default probabilities. We find a statistically significant relationship between the ESG score and the volatility and drift terms of the asset value process, suggesting that ESG factors are structurally connected to the value of the firm. We establish a mapping between ESG scores and the cost of equity and debt as implied by firm's contingent claims, and derive estimates of the ESG risk premium across different ESG and leverage profiles. In addition, we break down the ESG risk premia by industry, and demonstrate how practitioners can adjust the weighed average cost of capital of ESG laggard firms for valuation and decision making purposes.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2024.2394550 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:31:y:2025:i:4:p:427-450

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2024.2394550

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().